We are resuming coverage on MBSB with a NEUTRAL call and MYR2.55TP  (13% upside). 4Q14 results were  ahead of consensus expectations thanks to  a  one-off recognition  of  deferred tax  assets stemming  from collective allowances. Apart from that, loan  growth remained  subdued and  NIMs were under pressure, but asset quality  held up while MBSB has also started to adopt more stringent loan provisioning standards.

4Q14  results  ahead  of  consensus  expectations.  MBSB’s  4Q14  net profit  of  MYR393.1m  (+194%  YoY,  +104%  QoQ)  exceeded  consensus expectations, with 2014 net profit of MYR1.02bn  (+70% YoY) making up 132% of consensus full-year estimates. There was a net tax writeback of MYR306m  in  4Q14,  principally  due  to  the  recognition  of  deferred  tax assets of MYR366m relating to the treatment of collective allowances for tax  purposes.  The  impact  of  the  tax  writeback  was  partly  offset  by additional  collective  allowances  of  MYR177m  as  MBSB  took  the opportunity  from  the  tax  “income”  to  adopt  more  stringent  provisioning standards relating to its legacy mortgage non-performing loans (NPLs). Final and special net DPS declared were 10 sen and 2 sen respectively.

Loan  and  deposit  growth.  Loan  growth  was  muted  (+2%  YoY), reflecting  a  tougher  environment  for  personal  loans  post  the  various regulatory measures introduced. Meanwhile, customer deposits  declined by  2%  YoY,  resulting in  the  loan-to-deposit  ratio  (LDR)  rising  to  113% from 108% as at end-2013.

Asset  quality.  Asset  quality  improved  sequentially  with  absolute  gross NPLs slid  5% QoQ. Thus,  the gross  NPL  ratio  fell  40bps QoQ to 6.1% while loan loss coverage improved to 77% from 71% at end-3Q14.

Briefing highlights.  The move to more stringent provisioning standards is  ongoing  and  expected  to  take  two  years.  Thi s may keep  credit  cost elevated ahead. MBSB is also embarking on a new 5-year plan, with itskey focus being turning into a fully-compliant Islamic financial institution. Finally,  MBSB  is  revisiting  its  capital  needs  but  has  yet  to  decide  on whether debt or equity would be the preferred form of capital.

Forecasts and Investment case.  We reintroduce our FY15-17 earnings forecasts with 2015F net profit down 29% YoY in the absence of the tax writeback (2015F pre-tax profit up 3% YoY).  We are resuming coverage on  MBSB  with  a  NEUTRAL  call  and  TP  of  MYR2.55.  Our  valuation methodology  is  based  on  the  Gordon  Growth  Model  (GGM),  which assumes:  i)  a  cost  of  equity  of  10.9%, ii)  ROE  of 13.5%,  iii) long-term growth of 4%, and iv) 2015F BV/share of MYR1.88. 

Source: RHB